Monday, June 15, 2015

Generating bang for the buck from housing subsidies

The UK paid £24bn in rent subsidies in 2013-14, double the amount a decade ago and the equivalent of £1bn in every £4bn in Britain's budget deficit. the average UK home now costs a first-time buyer five times their income, up from 2.8 times in the early 1980s. That has in turn fuelled demand for rented accommodation, pushing up the costs and eating up increasing amounts of state subsidy... According to the Office for Budget Responsibility, last year the UK spent more than £25bn on rent and home ownership subsidies but ended up with just 141,000 new houses being built — at least 40 per cent below the level some economists argue it needs... Social landlords build about a fifth of

The article points to the dilemma between public spending to boost supply (through public housing projects and fiscal incentives to developers) and support demand (through home ownership and rental subsidies), and the overwhelming preference towards the latter in UK,

Despite spending £1.4bn a year on home ownership subsidies, funding for social housebuilding was cut in the last parliament from £2.3bn to £1.1bn a year... But campaigners argue that the money currently being spent on subsidising demand for housing through rents and ownership schemes — £115bn between 2010 and 2014 — should instead be spent on new housebuilding. The money would be enough to build 6.8m new state-backed homes at current average rates of subsidy: enough to house the country’s growing population for 31 years... Around a third of households in any developed economy need some form of financial help with their housing costs, experts say. In 1975 more than 80 per cent of UK government involvement in housing was focused on increasing supply — building new homes. But by 2000 the vast majority of Britain’s housing market subsidies went towards supporting demand, rather than supply.

In contrast, in India, affordable housing subsidy is almost completely spent on supply-side interventions - public housing projects, construction grants to developers, and affordable housing mandates. Rental housing subsidy is virtually absent and interest subvention subsidy initiatives remain still-born as the target group can rarely ever access mortgages. Even on the supply-side, the magnitude of support remains abysmally limited. While some amount of spending on public housing projects is essential, given its high percapita funding requirement, it can make only a marginal dent on the housing market. In contrast, demand-side measures like interest and rental subsidies, which require small percapita annual spending, can have a far larger impact.

The Union Budget 2015-16 allocated just Rs 14000 Cr (£1.43bn) for urban and rural housing. Assuming the state governments would add another Rs 6000 Cr, the total public spending on housing across the country would be about £2 bn. To put this in perspective, India would be trying to meet atleast twenty times UK's housing demand with a twelfth of its public spending. Worse still, the nature of the country's public spending on housing - the major share of resources go into public housing projects instead of demand side support measures - severely limits the bang for the buck from this meager public spending.

The article also points to this financing route for affordable housing programs,

In the UK a plot of land becomes available to build on when planning authorities give permission for a change of use — from farmland, industrial or commercial use. In places with high house prices, such approval can significantly increase the value of the land. It is possible for the state to acquire land for homes and then sell it on to developers, pocketing the difference in value. That money can then be used to subsidise more housebuilding. South Korea, Singapore, Hong Kong and Taiwan all use national development corporations in this way.

Unfortunately, given the poor enforcement of zoning regulations, the premium associated with land conversion is far lower in countries like India, thereby limiting their ability to capture value from this option.